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Inasmuch as the railroads are no longer insisting upon that part of the bills providing for a cost-rate structure, I will not read or comment upon those criticisms but still ask that it be kept in the statement.
I want to go now to the paragraph headed “Out-of-Pocket Cost" on page 12.
Basically out-of-pocket costs constitute the aggregate of all variable costs applicable to a particular traffic. What constitutes "out-ofpocket cost” varies widely depending on the period of time under study. In the short-range view, out-of-pocket costs of transportation will vary from almost nothing to as much as 50 percent or more of the full cost. This is true because over a short period of time it is impossible to adjust expenses completely as traffic increases or decreases. But in the long-range view and particularly over a period long enough to take in the entire cycle or life of the transportation service and the facilities required to provide it, the out-of-pocket cost will vary from around 80 to 100 percent of the full cost. The Commission's Bureau of Accounts, Cost Finding, and Valuation, after exhaustive studies of railroad expenses and their variation with traffic, has found that 20 percent of railroad costs are constant or nonvariable with traffic, and the remainder are out-of-pocket costs. On the other hand, motor-carrier costs are held by many cost experts to be almost 100 percent variable with traffic, a reflection of the relatively small fixed plant required by these carriers.
I should have said in connection with page 9, the table entitled "The Anatomy of Out-of-Pocket Costs," that the last column, 7, in that table, represents the out-of-pocket cost which was obtained by applying 80 percent to the total freight cost shown in cloumn 6. There is not included in that table the return on investment, which is within limits a part of the out-of-pocket cost as I shall hereafter point out.
The full cost, both out-ofpocket and constant of handling all traffic-and I want to emphasize the word "all”-is ascertainable but the full cost of any particular traffic or movement is not ascertainable because there is no known way of accurately distributing the constant or nonvariable elements between the traffics or movements. Probably the least arbitrary method of allocation is that of assigning the constant or non-variable cost among traffics in the same proportion as the variable or out-of-pocket cost is assigned.
Another method, and one which the Bureau of Accounts, Cost Finding, and Valuation sometimes uses with the caveat that it is wholly arbitrary, is to assign the constant or nonvariable cost upon the basis of tons in the case of terminal costs, and upon the basis of ton-miles in the case of terminal costs, and upon the basis of tonmiles in the case of linehaul costs. This method assumes that the constant cost varies with the weight or the weight distance, an assumption which is known to be contrary to the actual fact.
These constant or fixed costs, which together with the passenger and l. c. 1. deficits are called the "transportation burden.” That concept is highly important. That constitutes, on the whole one-third of the transportation cost.
It must be met from some or all of the traffic if the carrier operation is to remain profitable as a whole.
In the past, this burden has been assigned among the various traffics largely in accordance with the carriers' managerial judgment as to the ability of the traffic to bear the burden. Thus, commodities where the value of service is quite low have borne a relatively smaller share of the burden, whereas the more highly valued traffic and traffic where the value of service is greater, such as manufactured products, have ordinarily borne a relatively higher proportion of the transportation burden.
I will point out later the importance of this distribution of transportation burden in maintaining the free movement of raw materials and finished products throughout a country as geographically extensive as our own. Suffice it for the moment to say that both the railroads and the Commission have in the past insisted that each traffic contribute something to this burden, on the theory that the carrier is better off without the traffic unless some contribution is made toward that burden.
Under the proposed new standard of “directly ascertainable costs," it is possible that a carrier might establish rates which contribute nothing toward the overhead burden, and this a carrier might for a time be willing to do in order to eliminate a carrier competitor whose out-of-pocket cost was somewhat higher. It is by no means clear that under H. R. 6141 and H. R. 6142 the Commission would have any power to stop such a clearly destructive action if a covetous competitor concluded that its short-run advantage warranted the action.
Thus effective regulation of minimum rates is abandoned by the removal of any workable or defined standard by which the Commission can be guided in the discharge of its responsibility. Transportation cost-finding is not as yet and probably never will be an empirical science which can furnish answers of sufficient definiteness to warrant their use as a basis for ratemaking. Out-of-pocket costs are invaluable tools in testing the compensativeness of a particular rate or system of rates, but they are wholly deficient as a measure of a “just or reasonable rate” either minimum or maximum. The attempt to establish a system of rates based on costs has a foundation so utterly unrealistic and so indefinite and amorphous as to be impossible of application in anything other than a purely arbitrary manner. Established and time-tested standards of ratemaking are abandoned, and the regultory agency left without any clear and discernible guideposts to govern its execution of the congressional policy.
I pass from the question of a cost basis of rates to the issue which is sharply drawn between the railroads and the motor carriers and that is the desirability of competitive ratemaking.
A basic fallacy of the Advisory Committee lies in its confusion of competitive ratemaking with “free enterprise” and “dynamic competition." Actually, competitive ratemaking is the complete antithesis of both free enterprise and dynamic competition. With carriers freed of all restraint and competing for traffic upon the basis of cutrates, the conditions essential to free enterprise and dynamic competition will cease to exist, being supplanted by a monopoly by the carriers having the greatest economic strength.
For the past 50 years, we have relied as a Nation upon service competition in transportation as the best means of insuring technical advances, innovations and service improvement. Appreciating the importance of each of the different modes of transportation and their individual and unique contributions to a well-rounded national transportation system, the Interstate Commerce Commission has sought to carry out the national policy by preventing the excesses of unbridled rate competition among carriers.' To this end the commission sought to see to it that carriers compete vigorously with one another but that none compete so successfully that its competitors are destroyed.
It is now contended that we must abandon our reliance upon service competition as a promoter of development and progress in transportation, and that we should unleash the competitive forces in pricing or ratemaking and remove much of the power of the Interstate Commerce Commission to prevent competitive rate reductions. The carriers would gain new freedom to attempt to filch the traffic of their competitors by means of rate reductions, presumably so long as the resultant rates were above directly ascertainable costs, whatever that concept may mean. If all carriers and all modes of transportation were of relatively the same economic strength, and if all carriers had available to them captive or noncompetitive traffic from which they could recover the loss in revenue resulting from these competitive rate reductions, the suggested policy would be less disastrous to the concept of a sound national transportation system including all modes of transportation.
However, the railroads have relatively much greater economic strength than their competitors, the trucks and the water carriers. The rails have captive traffics such as coal, ore, and agricultural commodities for which the trucks at least are not competitive, and which the railroads can rely upon to continue to furnish traffic to support the rail rate war against the trucks and the water carriers. If freed from the restraining influence of regulation, the rails would be in a position to slash the rates on the traffic for which they are now competing with the trucks and the water carriers to a point where the trucks and the water carriers will be destroyed as effective competitors. This is what competitive ratemaking really is. It is not free enterprise or dynamic competition, but the most ruthless and destructive sort of economic warfare.
The prime objective in 1887 for the enactment of the Interstate Commerce Act was to establish the law of equality by eliminating discrimination between persons, places, and commodities. The railroads in their unbridled and unregulated competition with each other had sought to do then just what the railroads again seek to do here lure away the traffic of their competitors by means of rate concessions. As a result, shippers with large volumes of tonnage, such as Standard Oil in those days, cities with large industrial production and heavy inbound or outbound tonnage, and heavy-moving commodities, were the recipients of rate concessions from the traffic-hungry railroads. This situation Congress sought to correct by prohibiting unjust discrimination and preference in sections 2, 3, and 4.
Solicitation of traffic on the basis of rate concessions is no different today than it was in 1887, and the beneficiaries of this competitive ratemaking will be again the large shippers, large communities, and heavy-moving commodities. Its victims will be the small shipper, the small or unimportant locality, and those commodities which do not excite the avarice of the rail traffic managers. Thus, the so-called free
enterprise and dynamic competition will inevitably result in the preference of the large over the small and the destruction of equality of opportunity—the very basis of any free-enterprise system. Only if the Commission is permitted to continue to function as the arbiter of rate competition can truly dynamic competition be maintained.
The charge of the Advisory Committee report that the regulatory policy has not kept pace with changing competitive conditions is wholly without validity. The transportation policy has undergone thoroughgoing reconsideration by Congress in 1920 and 1940. The very sections of the national transportation policy which the bills would have you jettison were written at the behest and insistence of the Report of the Committee to Submit Recommendations Upon the General Transportation Situation appointed by President Roosevelt in 1938, consisting of the presidents of three of the largest railroads, Pennsylvania, Southern, and Union Pacific, and the chairmen of three of the largest brotherhoods of railroad employees. They were the ones responsible in large measure for the present transportation policy.
The soundness, equity, and justness of that policy was being extolled by the Association of American Railroads as late as November 1953, in its publication Railway Digest.
While it is true that a large part of the Interstate Commerce Act was developed in a period when the railroads had, by elimination of their water competitors, become the sole means of public surface transportation, there nevertheless was intensive competitive rivalry among the railroads themselves. The new competitive factor which has developed over the last 30 years has been interagency competition or competition between different modes of transportation.
The need for regulation of the rates of competing railroads was largely due to the requirement of equality. This need was increased, not lessened, by the advent of competing modes of transportation which brought into the struggle many thousands of additional competitors. If the railroads were the only mode of transportation the need for regulation of their rate competition would still exist.
I do not have to go further than to point out that that is exactly what the witness for the railroads said the other day, that they wanted to be protected against the competition of themselves, and that it was necessary to prevent them from competing with themselves and destroying themselves by their competition. Therefore, he was opposed to a suggestion that this dynamic ratemaking competition apply as between carriers, instead of, as proposed in the bills, between modes of transportation.
If the railroads did not exist, there would still be need for regulation of rate competition of the motor carriers among themselves. In the list which I read you earlier in the afternoon, out of 3,399 protestants against motor carrier tariffs, 2,140 were by other motor carriers.
Unregulated rate competition can be relied upon to prevent extortionate rates. It can also be relied upon most surely to destroy necessary transportation service and to assure inequality of charges among persons, places, and articles of commerce. These, in my opinion, will be its inevitable consequences.
It is claimed that the Commission should be forbidden, in the exercise of its rate regulatory powers, to consider the effect of a particular rate upon competing carriers or competing modes of transportation--a complete reversal of the policy urged for adoption by the railroads in 1940 and adopted by Congress in the Transportation Act of 1940. To some extent the complaint appears to be directed at the alleged Commission policy of allocating traffic among carriers to which I have already referred. But it also reflects the proponents' impatience with the time-honored policy of the Commission of seeking to prevent unfair and destructive competitive practices among competing carriers as well as among competing modes of transportation. In fact, such a policy is the inevitable corollary of the policy favoring the preservation of an adequate system of transportation by the various modes, which Congress had decreed the Commission should enforce. This is true because a sound and adequate national transportation system is impossible without adequate revenues to preserve and maintain adequate service.
Unfair or destructive rate competition consists in one carrier needlessly cutting rates and thus impairing the revenues of itself and other carriers for no other reason than to filch the traffic of and thereby destroy its competitor. If any carrier is left free to engage in such unfair or destructive competitive practices, revenues necessary to preserve adequate service are depleted, and ultimately the soundness and adequacy of the whole transportation system is impaired. Some independent and impartial regulatory agency with the general public interest at heart is necessary to assure that the individual carrier will not, in pursuit of its own immediate advantage, set about to destroy a competitor through unfair or destructive competitive practices. The principle was thus well put by the late Elmer A. Smith, former general counsel of the Illinois Central system, a distinguished and outstanding railroad statesman in every sense of the word.
I will not read the statement but will leave it the way it is in the statement. I will commend it to the attention of the committee.
The public interest in avoidance of destructive competition would be entrusted solely to the conscience of the individual carrier. We submit that nothing could be more surely destructive of a sound and adequate transportation system than the pursuit of such a shortsighted policy. In contrast the Commission has, therefore, in fixing minimum rates, first determined what constitutes a reasonable level of charges considering all the ratemaking factors and not cost alone, and it has then determined upon an adjustment which would permit the carriers to compete with each other upon approximately equal terms.
Under the present national transportation policy, the Commission probably has the power to impose minimum rates above a carrier's cost in order to preserve a national system of transportation consisting of more than a single mode of transportation. However, in the past 2 years, I have had occasion to read all of the decisions of the Commission on this subject since 1950. I have been able to find but one case where a division, never the Commission, has asserted that power. In that case, the division later reopened the proceeding for reconsideration and the complaint was subsequently withdrawn. There never has been an order such as that which has been hammered at this committee that the Commission has attempted to hold an umbrella over the rates of a competing carrier or has attempted to fix the rates of one carrier by the needs of another.